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Ambac Faces Do-or-Die in the New Year

The insurer has challenges on all fronts -- the possibility of a delisting, Wisconsin regulatory woes. The biggest is simply staying alive.
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faces a conundrum.

The New York-based insurer is under threat of delisting from the New York Stock Exchange because its stock price has fallen so low, and under pressure from Wisconsin's industry regulator because of shrinking risk capital at a subsidiary based in that state.

But Ambac's most important challenge is to remain solvent. The NYSE and the regulator take a back seat. Not even profits and losses matter.

Here's the problem: Ambac has a responsibility to its stockholders. According to SNL Financial, companies that hold Ambac stock as of Sept. 30 included

Affiliated Managers'

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Third Avenue Management subsidiary, with a 9.3% stake; and

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Smith Barney, with 5.2%. The portion of institutional stock held in the company fell 4.4% in the third quarter.

A delisting would severely reduce the value of the stock, as funds that own the stock would bail. On the other hand, time and money spent avoiding a delisting would detract from the insurer's attempts to focus on survival. Under NYSE rules, Ambac has until May 31 to raise the closing share price for a month to at least $1 and a 30-day closing average of at least $1 for that month. No additional plan is required to be submitted.

A popular method of avoiding a de-listing is to implement a reverse stock split. That could get the price up from 78 cents a share to $7.80 overnight, for example. Unfortunately, reverse splits also tend to result in a reduction of the stock price, as they sap investor confidence.

All is not lost, though. In many ways, solutions for Ambac's financial ills are the easiest way to boost the stock price. The company simply needs to report better-than-expected earnings or increased capital and surplus.

Short positions in Ambac are huge. There are 47.7 million shares, or 16.6% of outstanding stock, betting on a further decline.

Other stock-price remedies include a buyback. That's an unlikely scenario, given liquidity constraints. Ambac could also conclude a major remediation. The insurer hopes to get $1.9 billion stemming from residential mortgage-backed securities. Having only concluded a total of $60 million in remediation recoveries in total, good news on that front would lift the stock price.

Ambac could commute additional credit default swaps. That would result in reduced liabilities and, thus, increase capital and surplus.

Unfortunately, it's crystal clear that none of those ways of increasing the stock price have anything to do with the underlying business. Ambac is running on fumes -- it has no new business. The insurer could have hidden value if market conditions improve sufficiently, but can it survive long enough to find out?

Analysts' consensus stock price of $1 is optimistic, though entirely feasible. But, for now, Ambac is a speculator's dream stock. Fundamentals be damned, rumors are its lifeblood, facts irrelevant and even the perception of good news for the fourth quarter could keep the stock listed on the NYSE.

-- Reported by Gavin Magor in Jupiter, Fla.

Gavin Magor is the senior analyst responsible for assigning financial-strength ratings to insurance companies. He conducts industry analysis and supports consumer products. Magor has more than 22 years of international experience in operations and credit-risk management, commercial lending and analysis. His experience includes international assignments in Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.